Search
Ask a question
0 0

Net Present Value Question



I need help with the following problem:

You observe that retail properties in your city are in Phase II: Expansion of the Real Estate Cycle which means they’re likely to keep increasing in profitability and value for the next few years. You identify a vacant piece of land zoned for retail use which you can purchase for $8.00 million today (an amount which will need to be paid immediately).

After detailed analysis you find that constructing retail strip mall will take one year and cost $3.5 million (which will need to be paid at the end of Year 1).

Once the building is completed (at the end of the first year), you plan on renting out the space at annual profit (after all expenses) of $750,000 to be received at the end of each of the three years following the completion of the development.

Finally, having established a track record, you plan on selling the retail strip mall for $13 million at the end of the fourth year.

1) Using a table, lay out the stream of cash flows from this project. Clearly indicate the period, the cash inflow / outflow during each period, and the source (or use) of the cash flow. Hint: Your table should have at minimum six rows to be complete.

My answer:

Year 0 - 8 million (initial deposit) [outflow]

Year 1 -3.5 million (development costs) [outflow]

Year 2 750,000 (rent received) [inflow]

Year 3 750,000 (rent received) [inflow]

Year 4 750,000 (rent received) [inflow]

Year 4 13 million (sale of retail strip) [inflow]

2) Assuming your discount rate is 8%, what is the NPV of this project? Show your work.

I'm trying to put this into Excel, but can't get it to perform right. Is there a website that shows the steps and will calculate NPV? We are able to use any resources to calculate NPV, but I would like to see the steps that go into it.

3) Should you undertake this project? Why or why not? Explain with reference to the NPV rule.

I know if it's greater than or equal to zero, you should undertake the project, but I can't calculate the NPV right - I'm getting ($558,804.16) and I know it's supposed to be a positive number.

4) You are also considering buying and holding the vacant land and selling it at the end of four years to another developer. Following this strategy would mean you’d miss out on the annual profits from the building, but you would avoid the construction costs. Assume there are no direct expenses associated with holding the land and that you expect to sell it for $11 million four years from today. Which plan should you pursue? Explain your reasoning with reference to the NPV of each project.

I put these numbers into the NPV excel formula:

Year 0 - 8 million (initial deposit) [outflow]

Year 1 -3.5 million (development costs) [outflow]

Year 2 750,000 (rent received) [inflow]

Year 3 750,000 (rent received) [inflow]

Year 4 750,000 (rent received) [inflow]

Year 4 11 million (sale of retail strip) [inflow]

and it gives me ($1,819,143.41) which I know must be wrong because the Teacher's Aid said it was supposed to be a positive number.

I need help to find a website that will help me calculate the NPV and show me the steps it took so that I can understand what I'm missing.

Thank you for your help!

No answers ... yet!